In modern economic thinking, peace and prosperity go hand in hand. However, there are good reasons why in pre-modern societies, the opposite relationship held true – war, disease, and urban death spelled high incomes. This column explains why Europe’s rise to riches in the early modern period owed much to exceptionally bellicose international politics, urban overcrowding, and frequent epidemics.

In a pre-modern economy, incomes typically stagnate in the long run. Malthusian regimes are characterised by strongly declining marginal returns to labour. One-off improvements in technology can temporarily raise output per head. The additional income is spent on more (surviving) children, and population grows. As a result, output per head declines, and eventually labour productivity returns to its previous level. That is why, in HG Wells' phrase, earlier generations "spent the great gifts of science as rapidly as it got them in a mere insensate multiplication of the common life" (Wells, 1905).

How could an economy ever escape from this trap? To learn more about this question, we should look more closely at the continent that managed to overcome stagnation first. Long before growth accelerated for good in most countries, a first divergence occurred. European incomes by 1700 exceeded those in the rest of the world by a large margin. We explain the emergence of this income gap by a number of uniquely European features – an unusually high frequency of war, particularly unhealthy cities, and numerous deadly disease outbreaks.

The puzzle: The first divergence in worldwide incomes

European incomes by 1700 were markedly higher than they had been in 1500. According to the figures compiled by Angus Maddison (2001), all European countries including Mediterranean ones saw income growth of 35% to 180%. Within Europe, the northwest did markedly better than the rest. English and Dutch real wages surged during the early modern period.

How exceptional was this performance? Pomeranz (2000) claimed that the Yangtze Delta in China was just as productive as England. Detailed work on output statistics suggests that his claims must be rejected. While real wages in terms of grain were some 15-170% higher in England, English silver wages exceeded those of China by 120% to 550%. Since grain was effectively an untraded good internationally before 1800, the proper standard of comparison is the silver wage. Estimates for India suggest a similar gap vis-à-vis Europe (Broadberry and Dasgupta, 2006).

Urbanisation figures support this conclusion. They serve as a good proxy since people in towns need to be fed by farmers in the countryside. This requires a surplus of food production, which implies high labour productivity. Since agriculture is the largest single sector in all pre-modern economies, a productive agricultural sector is equivalent to high per capita output overall. Figure 1 compares European and Chinese urbanisation rates after the year 1000 AD. Independent of the series used, European rates increase rapidly during the early modern period. Our preferred measure – the DeVries series – increases from 5% to nearly 10% between 1500 and 1800. The contrast with China is striking. There, urbanisation stagnated near the 3% mark.

Figure 1. Europe versus China urbanisation rates, 1000-1800

In a Malthusian world, a divergence in living standards should be puzzling. Income gains from one-off inventions should have been temporary. Even ongoing productivity gains cannot account for the “first divergence” – TFP growth probably did not exceed 0.2%, and cannot explain the marked rise in output per capita.

The answer: Rising death rates and lower fertility

In a Malthusian world, incomes can increase if birth rates fall or death rates increase (Clark, 2007). Figure 2 illustrates the basic logic. Incomes are pinned down by the intersection of birth and death schedules (denoted b and d). The initial equilibrium is E0. If death rates shift out, to d’, incomes rise to the new equilibrium Ed1. Similarly, lower birth rates at any given level of income will lead to higher per capita incomes. In combination, shifts of the birth and death schedules to b’ and d’ will move the economy to equilibrium point E2.

Figure 2. Birth and death rates, and equilibrium per capita income

We argue that there were three factors – which we call the “Three Horsemen of Riches” – that shifted Europe’s death schedule outwards: wars, epidemics, and urban disease. Wars were unusually frequent. Epidemics were common, with devastating consequences. Finally, cities were particularly unhealthy, with death rates there exceeding birth rates by a large margin – without in-migration, European cities before 1850 would have disappeared.

Figure 3 shows the percentage of the European population affected by wars (defined as those living in areas where wars were fought). It rises from a little over 10% to 60% by the late seventeenth century. Tilly (1992) estimated that, on average, there was a war being fought somewhere in nine out of every ten years in Europe in the early modern period.

Political fragmentation combined with religious strife after 1500 to form a potent mix that produced almost constant military conflict. While the fighting itself only killed few people, armies marching across Europe spread diseases. It has been estimated that a single army of 6,000 men, dispatched from La Rochelle to fight in the Mantuan war, killed up to a million people by spreading the plague (Landers, 2003).

Figure 3. Share of European population in war zones

European cities were much unhealthier than their Far Eastern counterparts. They probably had death rates that exceeded rural ones by 50%. In China, the rates were broadly the same in urban and rural areas. The reason has to do with differences in diets, urban densities, and sanitation:

Europeans ate more meat, and hence kept more animals in close proximity,

European cities were protected by walls due to frequent wars, which could not be moved without major expense, and

Europeans dumped their chamber pots out of their windows, while human refuse was collected in Chinese cities and used as fertiliser in the countryside.

Epidemics were also frequent. The plague did not disappear from Europe after 1348. Indeed, plague outbreaks continued until the 1720s, peaking at over 700 per decade in the early 17th century. In addition to wars, epidemics were spread by trade. The last outbreak of the plague in Western Europe occurred in Marseille in 1720; a merchant vessel from the Levant spread the disease, causing 100,000 men and women to perish. Since Europe has much greater variety in terms of geography and climate than China, disease pools remained largely separate. When they became increasingly connected as a result of more trade and wars, mortality spiked.

Triggering European “exceptionalism”

In combination, the “Three Horsemen” – war, urbanisation, and trade-driven disease – probably raised death rates by one percentage point by 1700. Once death rates were higher, incomes could remain at an elevated level even in a Malthusian world. The crucial question then becomes why Europe developed such a particular set of factors driving up mortality.

We argue that the Great Plague of 1348-50 was the key. Between one third and one half of Europeans died. With land-labour ratios now higher, per capita output and wages surged. Since population losses were massive, they could not be compensated quickly. For a few generations, the old continent experienced a “golden age of labour”. British real wages only recovered their 1450s peak in the age of Queen Victoria (Phelps-Brown and Hopkins, 1981).

Temporarily higher wages changed the nature of demand. Despite having more children, people had more income than necessary for mere subsistence – population losses were too large to be absorbed entirely by the demographic response. Some of the surplus income was spent on manufactured goods. These goods were mainly produced in cities. Thus, urban centres grew in size. Higher incomes also generated more trade. Finally, the increasing number and wealth of cities expanded the size of the monetised sector of the economy. The wealth of cities could be taxed or seized by rulers. Resources available for fighting wars increased – war was effectively a superior good for early modern princes. Therefore, as per capita incomes increased, death rates rose in parallel. This generates a potential for multiple equilibria. Figure 4 illustrates the mechanism. The death rate increases over some part of the income range, which maps into urbanisation rates. Starting at E0, a sufficiently large shock will move the economy to point EH, where population is again stable.

Figure 4. Equilibria with “Horsemen effect”

In the discussion paper, we calibrate our model. The effect of higher mortality on living standards is large. We find that we can account for more than half of Europe’s precocious rise in per capita incomes until 1700.

Conclusions

To raise incomes in a Malthusian setting, death rates have to rise or fertility rates have to decline. We argue that a number of uniquely European characteristics – the fragmented nature of politics, unhealthy cities, and a geographically heterogeneous terrain – interacted with the shock of the 1348 plague to create exceptionally high mortality rates. These underpinned a high level of per capita income, but the riches were bought at a high cost in terms of human lives.

At the same time, there are good reasons to think that it is not entirely accidental that the countries (and regions) that were ahead in per capita income terms in 1700 were also the first to industrialise. How the world could escape the Malthusian trap at all has become a matter of intense interest to economists in recent years (Galor and Weil, 2000, Jones, 2001, Hansen and Prescott, 2002). In a related paper, we calibrate a simple growth model to show why high per capita income at an early stage may have been key for Europe’s rise after 1800 (Voigtländer and Voth, 2006).

In the “Three Horsemen of Riches”, we ask how Europe got to be rich in the first place. Our answer is best summarised by the smuggler Harry Lime, played by Orson Welles in the 1948 classic “The Third Man“:

"In Italy, for thirty years under the Borgias, they had warfare, terror, murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love; they had 500 years of democracy and peace – and what did that produce? The cuckoo clock."

We argue that a similar logic held in economic terms before the Industrial Revolution. Europe’s exceptional rise to early riches owed much to forces of destruction – war, aided by frequent disease outbreaks and deadly cities.